30th Sep 2020 10:30
(Alliance News) - Compass Group PLC on Wednesday said it was expecting a sharp revenue drop for its 2020 financial year, though there have been signs of improvement in its fourth quarter.
The Surrey-based contract caterer was the worst large-cap performer in morning trade in London, down 4.4% at 1,155.50 pence.
Compass said revenue for its financial year ending Wednesday was down 19%, having fallen 44% in the third quarter and 36% in the fourth.
The company said it saw some improvement in the fourth quarter as students began to return to schools and workers to offices.
However, it is reviewing its contract portfolio and currently estimates that, subject to audit, it will have to impair around GBP100 million of contract assets. Including these impairments, it expects to post a negative underlying operating margin of about 3% for the fourth quarter, improved from a 5.3% negative underlying operating margin in the third quarter. Before impairments, its operating margin was at breakeven in the fourth quarter.
For its financial year as a whole, compass expects to report a positive underlying operating margin after estimated contract impairments of around 3%.
Fourth quarter resizing costs amounted to around GBP90 million, giving financial 2020 total resizing costs of approximately GBP130 million. These are excluded from underlying operating profit.
By region, North America performance improved when Education clients started to reopen for the school year and Business & Industry began a slow recovery. Healthcare was strong but Sports & Leisure remained closed.
The company changed is management structure in Europe and its Middle East business it now being managed within its European business. For Europe, now including the Middle East, its Healthcare performance was good while there was a "meaningful increase in clients reopening" for both Education and Business & Industry. As in North America, the Sports & Leisure sector was mostly closed.
For the Rest of World region, which now excludes the Middle East, Education improved in its Asia Pacific business but there was no material change in the reopening rate for the sectors around the region.
It is expecting its financial 2020 tax year rate to be a few percentage points above the 24% half-year rate "as a result of the distortive impact of unrelieved foreign taxes and other non-tax-deductible expenses against a low profit base".
Capital expenditure in the fourth quarter came to around GBP175 million, with financial 2020 capex forecast at approximately GBP720 million.
Compass said its liquidity is still strong, expected to be around GBP5 million as at Wednesday this week, of which GBP2.8 million will be undrawn credit facilities, GBP600 million will be its available Covid corporate financing facility limit, with around GBP1.6 million in cash.
"Our solid financial position is allowing us to continue to invest in the business through the crisis to strengthen our competitive advantages and support our long-term growth prospects," said Compass.
Compass said: "We are pleased with our progress in the quarter and that the business is now at breakeven at a trading level. We continue to proactively manage the business, reducing our costs, rebuilding our margins and investing to strengthen our competitive advantages. However, the pace at which our revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the Northern Hemisphere through the winter months.
"Despite the current challenges, when looking further ahead, we remain excited about the significant structural market opportunity globally, and the return to organic revenue growth, margin improvement and returns to shareholders over time."
The firm will post its annual results on November 24 and will provide an additional trading update at that time.
By Anna Farley; [email protected]
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